Monthly Archives: November 2012

Is the Skills Gap Just A Pay Problem?

Let’s rethink the infamous “skills gap” that is almost as common in conversation in our machining clan as “the fiscal cliff.” Maybe the skills gap is partly a “pay gap.” Perhaps manufacturers who pay McDonald’s wages get McDonald’s employees with comparable turnover.

McDonald’s pays $14 an hour for a shift manager. They can get almost unlimited applicants for that job. Job shops think they can hire skilled workers for $14 and keep them, but they can’t. A shift manager at McDonald’s has a title with more cache and has more potential for advancement than most trainee CNC operators at Mac’s machine shop.

Adam Davidson, one of the smartest financial writers around, wrote a piece about this in the November 20, New York Times. He interviewed several people who argued that the skills gap was a function of the crappy wages being paid in manufacturing. I tend to agree with this thesis and have tried the idea out on several people in field who also agree.

Labor is a small component of the total expenses for most manufacturing businesses, but it is an absolutely crucial factor for success. Consider the possibility of losing your best workers for $5 per hour more than you presently pay them? Could you hire a comparable worker in a relatively short amount of time for the same money? If your health insurance costs rise year after year you probably pay it because you need it to keep your good people, yet most of us keep a tight rein on wages.

Over the years the most successful operators I’ve dealt with have been proud of their people and how long they have stayed. The marginal guys always bitch about their ungrateful employees. Successful companies have loyal employees. Others usually have unions.

Davidson’s point in the article was that smart companies will fill the skills gap by training their own people, keeping the good ones, and rewarding them well. This was the compact that made America the leader in manufacturing after World War II and it is the way Silicon Valley works today. My son-in-law Scott works for Google. They pay well for the talent they need and they do their utmost to retain it. There is no “free lunch,” but at Google lunch is delicious and free for employees.

After I bought out my brother at Graff-Pinkert in August I raised the salaries of the key shop employees because I wanted them to know that I valued them highly, and because I knew that I did not want to lose them.

Skills gap? Maybe. But it might evaporate if people were paid more.

Question: Would the skills gap shrink if shop employees were paid better?

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Selling a Machine Tool Museum

1-5/8” Greenlee automatic 6-spindle screw machine

Peter Bowman owns a small job shop near Green Bay, Wisconsin. He wrote me an email Monday asking for advice on how to sell the assortment of manual machine tools his father has accumulated in his small shop where Peter initially learned about the business.

Please read Mr. Bowman’s letter below and reply with suggestions. I will write my own reply on the blog in the comments following the letter.

Hello Lloyd,

My 75-year-old father just shut down his machine shop and asked me to sell off everything. The place is a museum of 1940-1965 manual machine tools and I can’t get anyone interested in making an offer for any of it, maybe because I’m at the end of the road here in Green Bay, WI. I have (2) 1-5/8″ 6-spindle Greenlees with (literally) a ton of tooling, a 1952 3″ G&L bar (boring mill), a 12″ chuck 1962 Monarch lathe, a 30” Blanchard, radial drills, grinders, dozens of lathe chucks, drill presses etc. etc. etc. – all of it in working order, but too old and worn for production guys and too big and costly to move for hobbyists. The scrap guy says he’ll take it, but I won’t get anything out of the deal. Is this why most people give in to the auctioneers and their high prices? I was able to sell off the few CNCs and the gear department for the same amount the auctioneers estimated, so it’s really just the leftovers here. I’m just trying to raise some cash so an old man can supplement his Social Security enough to stay in his house, but at this point it looks like we’re going to scrap it all out. What do others do in this situation? He owns the building, so there is no hurry – perhaps after we fall off the Cliff people will be looking to spend some money. Any advice would be appreciated.

Peter W. Bowman, Song Industries, Inc.

Question: How would you sell this stuff?

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A Christmas “Gift” From Sears

Inventor Dan Brown holding his Bionic Wrench (green) and the Chinese made Craftsman copy (red) sold by Sears.

Sears is a dwarf of the consumer superpower it used to be when it was the place you first thought of to do your shopping for a washing machine or a screwdriver. Now it’s becoming synonymous with screwing its suppliers.

ABC World News with Dianne Sawyer recently did a story about Sears hijacking the intellectual property of a brilliant tinkerer, Dan Brown. Brown built his little American company, LoggerHead Tools, on his elegant product called the Bionic Wrench, which grabs a nut on six sides so it won’t slip, as so often happens with your not-so-trusty crescent wrench.

Brown works in the great tradition of American garage inventors, playing with his idea until he got it right. He did make one giant mistake reaching for the brass ring though – he trusted Sears to have an exclusive to sell his baby.

I’ve had a bit of an inside view of this saga because Graff-Pinkert sold a Hydromat to a supplier of Brown. A few months ago Brown notified my customer that he was cancelling his orders because Sears had cancelled him out for Christmas. The reason soon became obvious, Sears is selling a knockoff of the Bionic Wrench in its Craftsman Tool line. The wrench is a Chinese copy of Brown’s product, which is blatantly clear to even the most casual observer, but Sears was willing to kick the little guy who allowed Sears an exclusive on his product.

If Sears was trying to kill LoggerHead Tools, they could not have had better timing. Brown had a ton of inventory in the pipeline for the Sears product. They stonewalled him on actually issuing the orders for Christmas, so he and his suppliers were in the quicksand of needing to produce to meet expected demand or face the prospect of not being able to deliver on time.

Since the Sears cancellation, Brown has laid off 31 workers and has been getting orders from other big box retailers, but he had accumulated a lot of inventory in anticipation of big Sears sales this Christmas. He is in a precarious spot because he trusted Craftsman, “America’s Most Trusted Tool Brand.”

Sears is not a big winner here. Brown is a resilient guy. He teaches design at Northwestern University and has been savvy enough to get some press coverage in The New York Times, which led to an Internet undertow against Sears and a national TV story on Diane Sawyer’s ABC World News broadcast. Sears is being sullied by the lousy publicity of intellectual property theft, pounding the little guy, and outsourcing a growing American made product to China with the accompanying job loss. It’s not a story that helps Sears endear itself to “Middle America,” which Sears intends to sell to.

Eddie Lampert, a former hedge fund mogul, bought a controlling interest in Sears Holdings Corporation a few years ago, and the stock has lost value year after year since he bought it. Amazon and Home Depot are eating its lunch.

Sears was shrewd to grab hold of Dan Brown’s Bionic Wrench in 2011, which they did well on. But by double crossing Brown in 2012 they now have a public relations mess on their hands, which is growing worse by the day. Brown has suffered a setback but his product is a good one, and it’s building its brand outside of Sears.

I’m ordering one myself today through Amazon because Sears was sneaky, arrogant and stupid.

Question: Is it a lost cause today for a little guy to develop a consumer product?

Read The NY Times article here. Visit LoggerHead Tools here.

Watch the video of Diane Sawyer’s story on the Bionic Wrench here.

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Housing on Fire

I have spent a lifetime playing the cyclical market for screw machines. And I still screw up.

By focusing on the BIG PICTURE – unemployment, Europe’s recession, the fiscal cliff, the 2012 election, oil prices – I’ve missed one of the most significant swings in the domestic economy. Housing. Sometimes you miss the newspaper on your doorstep. Housing in a lot of American markets is rebounding strong. Builders cannot find enough lots in locations where transportation is good, schools work and people feel safe to walk around.

The place to make money in real estate is Phoenix. It’s also the place to lose it. It is the yo-yo of domestic housing. Phoenix always seems to go crazy on the upside and the down. Three years ago they were giving houses away in Arizona. Today you can’t find a lot and prices are up 20 percent year to year.

If Phoenix is a yo-yo, Las Vegas is a boomerang. The huge oversupply of good lots is gone. Prices are moving up smartly after the recession nosedive. In Atlanta there is still a glut of lots – where people do not want to live, but in the desirable areas prices are bouncing up rapidly.

In housing, the national statistics are poor indicators. Like politics, housing is a local, granular story. Check pickup truck sales for a good look at housing – and what’s happening to Home Depot’s stock.

If housing is getting hot and cars are at 14.4 million for 2012, what does this mean for 2013?

The stock market is spooked by the Washington tax vs. spending argument and what it might mean for dividend recipients. Meanwhile, Warren Buffet has been buying Deere and Wells Fargo stock. Agriculture, construction machinery, mortgages – maybe he knows something. He just bought a furniture retailer too.

The picture within the picture is this. Two of the most important pieces of the domestic economy that affect manufacturing, cars and homes, are rebounding nicely. Product is coming back to America from China and Europe. Money is cheap. Savings returns stink. Unemployment, though bad for the country and devastating to individuals, is a wash for business today. There is less demand, but the labor market has a little slack.

When we always focus on the negative we miss the Phoenix rising from the ashes.

Questions: Should the country get rid of the Mortgage Interest tax deduction?

Is the deduction “welfare for the rich”?

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Is It Time to Take Risks?

The art of business is shrewd anticipation. This is particularly true in a speculative business like betting on the future values of secondhand machine tools, but almost every person who lives, works or invests in the American capitalist economy is forced to place some kind of bet, even if they push their worldly belongings down the street on wheels.

My question today is: WHEN should I place my bet? Playing poker, I’ve always wondered why people make big bets early in a hand as they gaze at only partial information visible to them. The bluff has a residual value in competitive poker, but usually not in business.

I look at my betting options today at Graff-Pinkert & Co. and think I have only three cards in a five-card game. I have a fair idea about what is left in the deck, but I am quite fuzzy about how they will be dealt out.

But like most people who play the game of business for big stakes, I always want to stay in the game, because you never know when a big opportunity–“The Royal Flush”–will suddenly appear.

The obvious cards in the deck today are those being dealt by the jokers in Washington. I think the outcome of the election makes some kind of deal likely by mid 2013. We know the deal, if it comes, will mean higher taxes for most people and some curtailment of Federal spending including military. Normally, this would spell “business slowdown” but not necessarily today because businesses have been extremely cautious for several years. Clarity may bring investment. If you know the rules of the game you are more likely to play and make bigger bets.

I have been intrigued recently by the apparent indifference about the likely expiration of the accelerated depreciation provisions December 31, 2012. If there was a comfort level in the economy, Graff-Pinkert‘s clients would be rushing to buy capital equipment before the end of the year. But they seem to be sitting on their checkbooks.

My father often told me the story about the decision he made in 1949 to liquidate his successful screw machine business. There was a mini-recession in that year and he and his partner Aaron Pinkert, scarred by the Great Depression, wanted to salvage the money they had made. They sold their National Acmes and New Britains for $2000 each. One year later, after the Korean War began, when they were back in the machinery business, they were paying $12,000 each for the same machines. What this story told me was that by the time all of the cards were visible it was too late to make big gains.

I had an interesting talk with a very sharp client of mine recently. He hired an investment advisor for $24,000 a year to feed him ideas about investments. His guy looks for overvalued or undervalued commodities and then proposes bets based on his findings. When I talked to him, his guru felt corn at $8 per bushel was too high and he recommended a sizable bet on a company that would make a lot of money on ethanol if corn fell. So far he has been right.

November 13, 2012. The pace of the poker game is picking up. Cards are being dealt and hands are being played. Most people are kibitzing around the table, but the intrepid ones are betting on imperfect information and intuition. My experience tells me that we are heading for a 16 million car year by 2014. That means good business in the screw machine world I live in. Time to place some bets? Man plans, God laughs.

Question: Is a state lottery evil?

Lloyd Graff is Owner and Chief Space Filler of Today’s Machining World, and Owner and Chief Space-Filler of Graff-Pinkert & Co.

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I Voted for Mitt Romney

I voted for Mitt Romney yesterday, knowing he would lose badly because he ran a horrible campaign. As I lamented to my sons before the election that Romney was going to be slaughtered in an election President Obama virtually dropped in his lap with his inept leadership, they both commented, “How can you vote for somebody who runs such a stupid campaign?”

Unfortunately, I did not have a good answer, except that my vote was a protest against Obama’s weak leadership.

I have given quite a bit of thought to how Romney could have won the election against Obama, a lousy president yet capable candidate with a very smart group of people guiding his moves.

Mitt Romney was badly wounded by the Republican primary. Newt Gingrich and Rick Santorum, two guys who were minor league candidates, ambushed him from the right flank. To blunt their barrage, Romney scurried to the right, which Obama then skillfully used to define Romney to the public. Romney was not nimble or clever enough to run back to the center after the primary season. I see Romney as an ambitious guy, driven to become President, thus surpassing his father who ran for the office but failed to get close.

What seemingly happened to Mitt was that he apparently was convinced by the characters like Gingrich that the country would accept right wing social policy, when Romney’s best chance was to run as a smart business guy – a technocrat – who could be the country’s capable CEO and forge compromises with Congress that Obama couldn’t.

Romney had the misfortune of hearing his idiotic remark about the 47% pop up, yet he still should have won against 8% unemployment, and Obama’s floundering on the economy.

This is what I would have advised Mitt, if he had asked.

1) You cannot win if you are the “old white man’s candidate.” There are just not enough of those folks who vote to get you to 270 electoral votes. Even if you concede African-Americans to Barack, you still need Latinos, women, and young people. So how do you get them and still hold your base? It’s not so hard. COME OUT for the Dream Act. This would have one-upped Obama and identified Romney as someone who was sympathetic to young undocumented immigrants who were adding value to the country. Such a stance would have cost him virtually nothing on the Right, but could have staunched the 70-30 pasting the GOP took from Latinos. George Bush got 41% of Hispanic voters in 2000. The Latino community has a conservative family oriented bent. The Democrats owned it in this election but they did not have to.

2) The gender gap could have been bridged if Romney had chosen a strong woman for Vice President, and I am not talking about Sarah Palin. In one of his infamous “binders” he could have found a woman like, well, Ann Romney who could have given his candidacy a softer, family friendly tone.

3) Romney ran a poll driven paint by the numbers campaign. He did not take risks or get out of his comfort zone. He did not talk to young people. He was irrelevant. To combat this Mitt should have advocated for the “decriminalization of marijuana.” The country is moving in this direction and he could have justified it to his base as a way to support law enforcement in America and reduce the profits of the drug cartels. He would have outflanked Obama with younger people and gained respect as a courageous and creative politician.

A Republican candidate who could not beat an unsuccessful and often arrogant or diffident Barack Obama probably did not deserve to become our President.

Question: Did Mitt Romney cost the Republicans the presidency in 2012?

Lloyd Graff is Owner and Chief Space Filler of Today’s Machining World, and Owner and Chief Space-Filler of Graff-Pinkert & Co.

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Empire of the In-Between

Courtesy of The New York Times.

As anyone who rides Amtrak between New York and Washington knows, the trip can be a dissonant experience. Inside the train, it’s all tidy and digital, everybody absorbed in laptops and iPhones, while outside the windows an entirely different world glides by. Traveling south is like moving through a curated exhibit of urban and industrial decay. There’s Newark and Trenton and the heroic wreckage in parts of Philadelphia, block after block of hulking edifices covered in graffiti, the boarded-up ghost neighborhoods of Baltimore made familiar by “The Wire” — all on the line that connects America’s financial center and its booming capital city.

The weirdness of this juxtaposition is hardly acknowledged anymore, because we’ve all had a few decades to get used to it. But for most of the 180 or so years of the train line’s existence, the endpoints of this journey — New York and D.C. — were subordinate to the roaring engines of productivity in between. The real value in America was created in Newark’s machine shops and tanneries, Trenton’s rubber and metal plants, Chester’s shipyard, Baltimore’s steel mills. That’s where raw material was turned into valued products by hard-working people who made decent wages even if they didn’t have a lot of education. Generation after generation, and wave after wave of immigrants, found opportunity along the corridor. Washington collected the taxes and made the rules. Wall Street got a small commission for turning the nation’s savings into industrial investment. But nobody would have ever confused either as America’s driving force.

This model was flipped inside out as Wall Street and D.C. became central drivers, not secondary supports, of the nation’s economy. Now, on its route between them, the train passes directly through or near 8 of the 10 richest counties in the United States, but all of this wealth is concentrated near the endpointsof the journey: Manhattan’s satellites in northern New Jersey and the towns where lobbyists and government contractors live in suburban Virginia and Maryland. This is a geographic representation of a telling contradiction. For the past 30-plus years, through Republican and Democratic administrations, there has been much lip service paid to the idea that the era of big government is over. Long live free enterprise. And yet in the case of those areas surrounding the capital, wealth has gravitated to the exact spot where government regulation is created. Why? Because many businesses discovered that renegotiating the terms between government and the private sector can be extraordinarily lucrative. A few remarkable books by professors at N.Y.U.’s Stern School of Business argue that a primary source of profit for Wall Street over the past 15 to 20 years could be what I call the Acela Strategy: making money by exploiting regulation rather than by creating more effective ways to finance the rest of the economy.

But how do we make sense of what has become of the in-between? That was the challenge we posed to the South African photojournalist Pieter Hugo. This fall, Hugo spent two weeks documenting life along the corridor, focusing his gaze on what can be found roughly within sight of the train tracks. That was our animating idea and organizing principle: to stop and look carefully at what can be glimpsed only fleetingly from a passing train.

Though industrial decline can have a perversely romantic appeal, we weren’t especially interested in rehashing the sad state of old factories. Instead, Hugo sought out the everyday life that dwells in these fissures of the American economy: the retired factory worker still making his home in a neighborhood that has decayed around him, the kids playing on blown-out streets, the store that sells used tools.

This is an economy changing too fast for the residents to keep up. For many who live along the corridor, the central theme is the decline that’s all too visible. The old brick factory buildings with huge windows that gave workers light and air in a pre-air-conditioned world are boarded up, crumbling or, in a few of the luckier spots, being converted into condos. There’s also another, somewhat more hopeful story on display, though you have to look a little harder to see it. These are the decidedly unromantic houses of modern production: short, vast complexes, built without any nod to aesthetics. There are few windows in these buildings, because precision machinery operates best without the fluctuations in heat and humidity caused by exposure to the sun. They are one story high, because it’s too costly to build a second or third floor capable of withstanding the weight and pounding of massive machinery. There are some workers inside — there to make sure the machines keep running — but not many. These jobs, which go to people with advanced, post-high-school training, typically offer a good-enough wage to afford a house in the suburbs, far from the industrial zones that hug the rail line. The people who do make their lives right next to these factories — in Elizabeth, N.J., or Chester, Pa., say — generally can’t afford the technical schooling that would qualify them for jobs inside.

The atrophying of the country’s ability to “make real things” has been much lamented, but the truth is that U.S. manufacturing has never been stronger. While there are no universally accepted numbers, the United Nations Statistics Division calculates that the dollar value of goods made in America is at an all-time high of $1.9 trillion, just about even with China. The catch is that the number of American workers needed to create all thatvalue has dropped steadily. In the mid-1940s, more than half of the New Jersey work force was in factories; today around 7 percent do. Thereare the same number of manufacturing jobs nationwide as there were in 1941, when the country was just more than one-third its current population. For much of the 20th century — and especially in the boom decades of the ’50s and ’60s, when U.S. factories had little global competition — manufacturing provided something that simply doesn’t exist anymore: a job for anyone willing to put in a hard day’s work. The Boeing plant making Chinook helicopters outside Philly, the Johnson & Johnson campus in New Brunswick, N.J., the Merck plants in Rahway, N.J., and Fort Washington, Pa., and the acres of chemical and natural gas refineries throughout New Jersey, Pennsylvania and Delaware — they all tell the same story: a handful of highly trained workers guiding machines that return huge value to shareholders while all the time finding ways to produce more goods with fewer workers.

That doesn’t stop both presidential candidates from constantly invoking the magnificent working-class economy we once had and can have again, if only we give them our vote. Manufacturing nostalgia is as powerful as ever. But one more look out the Amtrak window reveals something else: the shiny new buildings that are actually filled with workers have nothing to do with manufacturing. They’re in the broad service sector, in the anonymous office centers that bloomed out of nowhere — near Metropark Station in New Jersey and in Claymont, Del., and Aberdeen, Md. — to hold law firms and engineering companies and I.T. firms. For people with advanced training, the service sector means an above-average wage, a below-average risk of unemployment and days sitting at a desk. For those with only a high-school degree or no degree at all, far fewer jobs are available, and the ones that are pay poorly and disappear quickly. Calling for a return to the days when everybody who was willing to put in a hard day’s work could make a good living at the factory is a fantasy, maybe a lie and certainly an implicit acknowledgment that nobody has any idea what to do with the underemployed in the slums of Trenton, Philadelphia, Baltimore and Southeast D.C. It’s safer to talk about Pakistan.

The contradictions along the line converge near the center, in the city that is arguably the most representative of our new and confusing economy. Wilmington, Del., has become wildly successful as the place where Wall Street and D.C. meet. In 1981, Gov. Pierre S. du Pont, who got to office, in part, because of his family’s old-economy wealth, pushed through the Financial Center Development Act, which led to the state’s new economic engine: regulatory arbitrage. For large financial firms, the state offers uniquely compliant rules (European politicians and economists talk, with horror, of the Delaware effect, which will inevitably lead toward ever-looser regulation). The state’s Web site claims that 63 percent of Fortune 500 companies and half of all publicly traded companies are legally incorporated in Delaware — “because we provide a complete package of incorporation services including modern and flexible corporate laws . . . [and] a business-friendly state government” — and yet only two have their headquarters there: DuPont and, notably, Sallie Mae, technically a private firm but one that owes its existence and profit to government guarantees. The rest of the buildings house tens of thousands of highly paid lawyers, accountants and other specialists engaged in the arcane work of taking advantage of flexible, business-friendly corporate laws.

After all those workers return to the wealthy suburbs at the end of the day, what’s left behind is one of the most dangerous cities in America, its unemployment stuck stubbornly two points above the national average. For those who live there, the future is grim. As DuPont’s C.E.O., John Challenger, who might as well have been speaking at any point in the past 30 years, said the week before last, the recent announcement of 1,500 layoffs “may be a harbinger of things to come.”

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Dealing With Loss

The aftermath of Super-storm Sandy makes me ask the question whether a generator should become standard equipment in homes and businesses. My wife has a big family in New Jersey and New York. Many of them have sought refuge this week at a close by lake home they own jointly that has a built-in generator.

At Graff-Pinkert we lose power several times a year. It has become more than an inconvenience. Our phone and Internet service are tied to the electric grid. I’m starting to think we should buy a generator for the office, and possibly at least a portion of the plant. What are you doing about backup electricity?

*****

Sharp, Olympus, Panasonic – Japanese companies that were icons 10 or 20 years ago – are in a terrible state. Sharp may not survive at all, Olympus has been scandalized, and Panasonic just showed a $10 billion loss.

But at least on the machine tool front, the Japanese builders are generally doing well. Mazak, Mori-Seiki and Okuma are prominent world players. In the specialty niche of sliding headstock lathes, Citizen and Star, arch competitors despite interlocking financial structures (Citizen owns a big piece of Star stock), dominate the world market.

As for cars, Toyota has lost its mojo in recent years, and Honda has become synonymous with boring, though they both make wonderful reliable vehicles.

In consumer goods Japan is slipping badly. Even in video game devices Microsoft’s Xbox 360 reigns, but the real money is in the creative part – the games, where the Japanese are also weak.

Is China the next Japan-like bubble to burst? Or is it us? Will Apple or Google be Sony and Panasonic in 10 years?

*****

I am prepared to reluctantly press the lever for Mitt Romney Tuesday, but I have another interesting choice for Congress. My 9-term Congressman is Jesse Jackson Jr. He is an emotional mess, suffering from bipolar illness and is significantly disabled by it. My Republican Senator from Illinois, Ron Kirk, is recovering slowly from a severe stroke, also.

Jackson will probably win the election because he is running against unknown, tarnished, weaklings. What a great system we have. Jesse’s one “campaign” appearance was a robocall, which could have been recorded by an actor. He primarily told his constituents he is sick – but getting better.

Because I am friends with one of his staffers who cherishes her position, I’ll probably vote for Jesse and see what happens.

Question: If your home was being destroyed and you could only take one thing with you, what would it be?

Lloyd Graff is Owner and Chief Space Filler of Today’s Machining World, and Owner and Chief Space-Filler of Graff-Pinkert & Co.

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